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GUEST COMMENT Built to serve billions: how Bitcoin knocks down the barriers and costs of current payment systems

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For the vast potentials of a more inclusive globalized economy to be realized, the world requires modernized payment systems built for the task of handling transactions on a planetary scale, where every inhabitant of Earth is empowered to participate in the borderless and bustling global marketplace of the future. At its heart, the story of the world economy’s future is one of expanding access, as new technologies place financial tools taken for granted in the most industrialized countries, such as bank accounts and the capability to make digital payments, into the hands of those in developing countries who will gain access to global commerce for the first time. It’s also the story of emerging payments systems that can reach across borders without exorbitant costs or friction, overcoming historical barriers that have stifled the flow of cross-border commerce. And it’s the tale of how those legacy payment systems are ready to be replaced by more efficient, secure and accessible systems.

As a decentralized currency and financial apparatus with a global reach, Bitcoin demonstrates the technological aptitude to deliver on every advantage of a modernized payments system, ready to transform global commerce by reducing the transaction fees and removing friction in the current system, eliminating cross-border fees, and easily expanding access to powerful financial services worldwide. This is how and why Bitcoin is emerging as a strong candidate to be the platform upon which the global marketplace of the future is established.

The house of (credit and debit) cards will fall

The card-based payments systems widely used today were never designed for online commerce, and increasingly complex security measures are necessary to combat the sophisticated crime rings that prey upon their vulnerabilities. Massive data breaches of card information have become commonplace, leading to spikes in payment fraud and identity theft.

Because the credit card companies and banking institutions behind these cards most often have zero-liability policies for their card users, the harm from this fundamentally flawed system may not be readily apparent. However, card issuers charge transaction fees that can be more than 3% on every purchase, adding a steep cost to merchants which is ultimately borne by consumers.

The reality is that for most purchases, everyone is paying 3% more than they might if the payments system being used was reliably secure. These ‘interchange’ fees make a deep gouge in merchants’ bottom lines and represent a high barrier to the growth of commerce globally. The card issuers justify these fees by explaining that they need to cover their costs when cardholders default on payments they owe, and to cover the sizeable cost of card rewards programs, which encourage consumer spending and thus benefit merchants. In reality, however, merchants must subsidize the costs of this system which creates loyalty between cardholders and the bankcard issuers – not the retailers – while also bearing the risk of loss due to chargebacks when cardholders claim that charges were made fraudulently. At the same time, criminals are engaged in an arms race to defeat fraud prevention efforts – at this moment, thousands of valid credit cards including security codes are on sale for as little as $0.50 on black markets. As a result, banks will over-zealously decline card transactions and often freeze legitimate accounts in an effort to stop fraud (if you’ve ever been traveling and had to call your card provider to reactivate your account, you’ve experienced this phenomenon). TrustInsight (a division of Experian) found that card-issuers and merchants decline $40 billion in otherwise legitimate transactions annually due to fear of fraud. Consumers are frustrated, and merchants suffer a massive deadweight loss – yet the fraud continues.

Ironically, interchange fees extracted from merchants (and thereby customers) are propping-up this fundamentally flawed payment system. Bottomline: when you swipe your card, the card networks are swiping your money. This grim reality is the primary reason why the universal acceptance of digital currencies such as Bitcoin is inevitable: as a cryptographically secure system, Bitcoin eliminates the need for these fees, ensures that users’ funds are always available to them, allows merchants to accept transactions without fear of chargebacks or fraud, and in so doing lowers prices for customers.

Bitcoin is an all access currency and payments system

One of the great advances of the 21st century promises to be the rapid expansion of access to financial tools globally. The delivery system for these tools will be mobile phones – in the last year 600 million people gained a smartphone, and with it access to online financial tools and commerce. According to World Bank data, in the developing world, just four in ten adults have a bank account and only 7% hold a credit card. However, mobile adoption has now reached over 6 billion people who do not regularly keep a bank account. These are individuals who have never had a credit card and likely never will, but through mobile access and Bitcoin’s financial technology, they will be able to leapfrog over the current financial services systems and the barriers built into them.

The global internet enables retailers to reach consumers anywhere on the planet, but friction between regional payment networks multiplies transaction fees for cross-border commerce. There are literally billions of people in emerging markets who have capital and can increasingly access the internet through smartphones. These mobile subscribers will become online buyers if given the financial and transactional tools to do so. Converting cash to digital currency can extend their economic participation outside of their local area and enable individuals living abroad to send money home to family members without suffering huge transaction costs: remittance providers like Western Union and MoneyGram can charge over 12 percent on even small amounts. Empowered by Bitcoin apps on their mobile phones, these same users are now able to load their funds into bitcoin wallets and complete those cross-border transfers at a miniscule cost.

Bitcoin creates a borderless marketplace for consumers and merchants by avoiding any additional fees for international transactions. With the ability to complete bitcoin transactions via mobile, customers are able to act without geographic limitations on where they can purchase goods and services. As consumers and merchants explore their new global reach, competition will increase, prices will fall, and emerging markets will expand and thrive. It’s easy to imagine a bright future where any customer can go online to buy an item, and be able to compare a myriad of options from merchants everywhere on the globe. The world is ready for a solution that equips billions more people with powerful financial capabilities. In this way, the “no-borders” properties of bitcoin will have a transformatively positive effect not only on e-commerce, but on global prosperity as well.

John McDonnell is CEO of Bitnet.

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